Capital Gains Tax Allowance 2022/23 for Trusts: The Hidden Loopholes You’re Missing

Imagine waking up to realize you've missed out on a crucial tax-saving opportunity. That’s the feeling many trustees had when they discovered the changes to capital gains tax (CGT) allowances in the 2022/23 tax year. While headlines focus on personal tax implications, the impact on trusts is often overlooked, leading to potential oversights that can cost trustees and beneficiaries thousands of pounds. But there’s still time to understand the intricacies and act.

Trusts have historically been a strategic tool for estate planning and asset protection, providing flexibility in managing wealth across generations. But with changes in tax legislation, these benefits are becoming more complicated to navigate—especially when it comes to CGT. The 2022/23 tax year brought specific changes to CGT allowances that trustees need to be aware of.

What Changed for Trusts in 2022/23?

In the 2022/23 tax year, the capital gains tax allowance for individuals was set at £12,300. Trusts, however, are treated differently. The CGT allowance for trusts is half of the individual rate, meaning trusts had an allowance of £6,150 for the 2022/23 tax year. If you have multiple trusts, the allowance can be reduced further, down to a minimum of £1,230. This is known as the "settlement rule," and it prevents trustees from exploiting multiple trusts to maximize allowances.

The settlement rule means that for multiple trusts, the allowance must be shared between them, with the minimum allocation being £1,230 per trust. This means if you have two or more trusts, your total CGT allowance might be significantly lower than expected.

Here’s where things get tricky: most trustees don’t realize that failing to properly account for these allowances can lead to an overpayment of tax. What happens if you don’t plan ahead? You might be left with a hefty tax bill, especially if the trust realizes significant gains through the sale of assets.

A Case of Missed Opportunities

Let’s take the example of a family trust that was set up in 2010. The trust held various investments, including a portfolio of stocks and a rental property. Over the years, these assets appreciated in value, and in 2022, the trustees decided to sell some of the stocks, which resulted in a gain of £50,000.

Had they been aware of the £6,150 CGT allowance for trusts, they could have planned the sale in a way that minimized the taxable gain. But because they overlooked the updated allowance and failed to account for multiple trusts within the family, they were taxed on the full gain after the reduced allowance was applied.

The result? A tax bill that could have been significantly lower if they had split the sales over multiple tax years or if they had used other trusts within the family to spread the gains.

Key Takeaway: Trustees need to stay informed about changes in tax legislation to avoid costly mistakes. Don’t assume that the rules for individuals apply to trusts—there are important differences that can either save you money or cost you dearly.

Understanding Trust CGT Rates

Another crucial element to consider is the tax rate applied to capital gains within a trust. For individuals, capital gains are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers. However, trusts are always taxed at the higher rate, which means gains are taxed at 20% for most assets and 28% for residential property. This can make a significant difference when planning asset disposals.

Consider the sale of a rental property held within a trust. Let’s say the property was sold for a gain of £100,000. After applying the reduced CGT allowance of £6,150, the taxable gain would be £93,850. At the 28% tax rate, this results in a tax liability of £26,278. If the same gain had been realized by an individual at the lower tax rate, the tax bill would have been £18,770—a difference of over £7,500!

For trustees, the takeaway is clear: it’s not just the CGT allowance you need to worry about—it’s also the rate at which those gains are taxed.

Strategies to Minimize CGT for Trusts

Given the complexity and potential for high tax bills, what strategies can trustees use to minimize their CGT liability? Here are some approaches:

1. Spread Asset Sales: Rather than selling all assets in one tax year, consider spreading disposals over multiple years to maximize the CGT allowance each year.

2. Utilize Multiple Trusts: If you have multiple trusts, use the allowances across them to reduce the taxable gains in each trust. Be mindful of the settlement rule, but with careful planning, you can still benefit.

3. Hold Investments for Long-Term Growth: Trusts can benefit from holding investments for longer periods to allow for future gains to be offset against future allowances or tax planning strategies.

4. Consider Trustee Residence: The tax residency of the trustees can also impact the CGT liability. Non-resident trustees may be subject to different tax rules, which can provide opportunities for tax planning.

5. Review Trust Deeds: Some trusts have clauses that allow flexibility in asset management, such as appointing assets to beneficiaries at different stages. By reviewing and understanding the trust deed, you can make decisions that reduce CGT liabilities.

The Importance of Regular Reviews

Tax legislation is constantly changing, and what worked for a trust last year may no longer be applicable. For example, in the 2023/24 tax year, the CGT allowance for individuals was reduced to £6,000, which also affected trusts, reducing the allowance even further to £3,000. Trustees who fail to keep up with these changes risk missing out on valuable tax-saving opportunities.

Regular reviews of the trust’s financial situation are essential. Trustees should work closely with tax advisors to ensure they are making the most of the available allowances and tax strategies. Failure to do so could result in significant financial losses for the trust and its beneficiaries.

The Future of Capital Gains Tax for Trusts

With increasing government focus on tax revenue, it’s likely that further changes to CGT legislation could impact trusts in the future. There has been speculation about further reductions in the CGT allowance and potential increases in tax rates, especially for higher earners and wealth held in trusts.

For now, trustees must remain vigilant and proactive in managing their assets. Don’t wait until the end of the tax year to assess your trust’s position. By staying informed and seeking expert advice, you can navigate the complexities of CGT for trusts and protect the wealth held for future generations.

Conclusion: The Time to Act is Now

Capital gains tax for trusts is an often-overlooked area, but it carries significant financial implications. The changes in the 2022/23 tax year are just the beginning. Trustees who don’t stay on top of these developments could end up paying far more in taxes than necessary, reducing the overall value of the trust.

Now is the time to take action. Review your trust’s asset holdings, consult with tax experts, and ensure you are fully utilizing the available allowances and strategies. The more proactive you are, the better positioned you’ll be to protect the trust’s wealth for the future.

In the world of trusts, knowledge is power—and in this case, knowledge can also save you a lot of money.